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E*TRADE Financial (ETFC) Beats on Q3 Earnings & Revenues

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Shares of E*TRADE Financial Corporation gained more than 2% in the after-market trading following the release of its third-quarter 2016 results. Earnings came in at 51 cents per share, comfortably beating the Zacks Consensus Estimate of 38 cents. The bottom line also improved significantly year over year on an adjusted basis.

Results were aided by higher revenues, reduced expenses and a benefit from provisions. While the quarter witnessed a decline in daily average revenue trades (DARTs), the company benefited from the acquisition of online options broker – OptionsHouse – that closed on Sep 12, 2016. The acquisition resulted in growth in brokerage assets

Karl Roessner, the newly appointed Chief Executive Officer of E*TRADE stated, “We have a handful of clear-cut objectives around which we have aligned: First, to swiftly and flawlessly integrate OptionsHouse, with a commitment to fully realize the value of the acquisition; second, to reclaim our position as a trading powerhouse while at the same time emphasizing our investing offerings; and third, to improve our marketing to more effectively engage with customers and prospects.”

Net income for the reported quarter was $139 million, up from $96 million in the prior-year quarter. Net income for the prior-year quarter excludes pre-tax charges of $409 million tied with the termination of the company's legacy wholesale funding obligations and other early extinguishment of debt.


Revenues Rise, Expenses Down

Net revenue for third-quarter 2016 came in at $486 million, surpassing the Zacks Consensus Estimate of $467.6 million. Revenues were up nearly 13% from the prior-year quarter on an adjusted basis.

Net interest income increased 15% on a year-over-year basis to $287 million, primarily due to reduced expenses as well as higher interest income. Net interest margin was 2.59%, up from 2.47% in the year-ago quarter.

Non-interest income was of $199 million against a loss of $188 million in the prior-year quarter. The reported quarter recorded higher fees and service charges, and a slight decline in commissions.

Total non-interest expense dropped 3% year over year to $323 million. The reported quarter included $6 million of executive severance and $25 million tied with restructuring and acquisition-related activities. The prior-year quarter included $39 million of losses on early extinguishment of debt.

Trading Performance Reflects Benefit from OptionsHouse Acquisition

Total DARTs decreased 3% year over year to 151,905. Notably, the reported quarter included 6,500 DARTs from the company’s OptionsHouse acquisition.

At the end of the reported quarter, E*TRADE had 5.2 million customer accounts (including 3.4 million brokerage accounts), up 6% from the year-ago quarter.

Further, the company’s total customer assets were $306.8 billion, up 11% year over year. Brokerage-related cash increased 20% year over year to $48.3 billion.

Notably, customers were net sellers of about $2.4 billion of securities compared with net buyers $3.7 billion in the prior-year quarter. Net new brokerage assets totaled $5.4 billion, up from $2.1 billion in the prior-year quarter.  The reported quarter reflected benefit of 3.7 billion in new brokerage assets from the OptionsHouse acquisition.

Improved Credit Quality

E*TRADE recorded net recoveries of $4 million in the quarter compared with charge-offs of $1 million in the year-ago quarter. Further, benefit to provision for loan losses was $62 million, up from benefit of $25 million in the year-ago quarter.

Allowance for loan losses declined 38% year over year to $235 million.

Additionally, total special delinquencies (30 to 89 days delinquent) declined 6% year over year to $107 million in E*TRADE’s entire loan portfolio. Notably, total delinquent loans declined 28% year over year to $302 million.

Balance Sheet and Capital Ratios

E*TRADE continued to lower its balance-sheet risk. The company’s loan portfolio totaled $3.8 million at the end of the reported quarter, down 22% year over year.

As of Sep 30, 2016, E*TRADE had total assets of $49.2 billion, stable with the prior quarter.

The company’s capital ratios remained strong. Under the Basel III Standardized Approach that was brought into effect in Jan 2015, E*TRADE reported Common Equity Tier 1 ratio of 34.0% compared with 39.5% in the year-ago quarter. Total risk-based capital ratio was 40.7% versus 44.3% in the prior-year quarter.

Our Viewpoint

Results of E*TRADE show a decent performance. We expect the company’s focus on core operations and strategic initiatives to lead to an improved profitability, going forward. However, we remain cautious, given the competitive pressure and macro headwinds.

E TRADE FINL CP Price, Consensus and EPS Surprise

E*TRADE currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Investment Brokers

Interactive Brokers Group, Inc. (IBKR - Free Report) reported a negative earnings surprise of 6.3% in third-quarter 2016. Adjusted earnings per share of 30 cents lagged the Zacks Consensus Estimate by 2 cents. Moreover, earnings compared unfavorably with the prior-year quarter tally of 35 cents. Decline in revenues, increased expenses and dismal performance of the Market Making segment led to the unfavorable result. However, on the upside, the company experienced notable increase in net interest income, gain on currency diversification strategy and growth in customer equity.

The Charles Schwab Corp. (SCHW - Free Report) reported third-quarter 2016 adjusted earnings of 34 cents per share, beating the Zacks Consensus Estimate by a penny. Results excluded litigation proceeds of nearly $14 million, related to the company’s non-agency residential mortgage-backed securities portfolio. Revenue growth, lower level of fee waivers and stable provisions acted as tailwinds. However, higher expenses remained a concern.

We now look forward to TD Ameritrade Holding Corp. (AMTD - Free Report) which is scheduled to report results on Oct 25.

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